The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

21 September 2011

NO.028

Ministerial Statement
Tax Reform and Our Patchwork Economy

Parliament House, Canberra

21 September 2011

Mr Speaker, in just two weeks time the Government will provide an important opportunity for a broad group of Australians to help chart the next steps forward in Australia's tax reform journey.

I'm personally looking forward to meeting with almost 200 representatives of community groups, business, super funds and other investors, academics and professional economists, and more – drawn from right around the country.

I want to hear everybody's ideas, whether I agree with them or not. The nation will be better for the debate.

It will be the most important gathering of tax experts and advocates in the country since at least the mid 1980s.

Each participant understands, as the Government understands, the critical role our tax system plays in our modern economy. The role it plays in generating the revenue to fund the quality public services that the community needs, whether they be health, education, national security or the social safety net. And how it affects the millions of choices that Australians make every day – about working, saving, investing and spending.

That's why our tax system is at the heart of public policy in Australia, and at the heart of our reform agenda. It's why we have gone to such lengths to lead and encourage a national conversation; and why I'm pleased to update the House today on planning and thinking ahead of the forum.

The Tax System Today

Mr Speaker, our tax system is already undergoing serious reform, at the same time as we honour our commitment to keep tax as a share of the economy below the level we inherited from those opposite.

Unfortunately the partisan and political debate obscures the fact that this year, tax is estimated to account for 21.8 per cent of GDP: easily below the 23.5 per cent we inherited from our predecessors in 2007-08. And much less than the 24.1 per cent all time record set by those opposite in 2004-05 and 2005-06.

We've kept the overall level of tax low at the same time as implementing great swathes of the tax review. We've announced 32 reforms that deliver on ideas in the tax review – a quiet revolution across all parts of our tax and payments systems.

In personal tax, we're rewarding work by trebling the tax-free threshold from $6,000 to $18,200, also making tax time simpler. We're phasing out the Dependent Spouse Tax Offset which reduced work incentives for low-income secondary earners. And all this builds on $47 billion of personal tax cuts already delivered.

In superannuation, we're boosting retirement savings by taking the super guarantee to 12 per cent, and introducing fairer concessions for 3.5 million low-income earners and larger contributions caps for over 50s.

In business tax, we're cutting company tax, delivering around $1 billion worth of new small business tax breaks, improving research and development tax incentives, and putting in place better resource tax arrangements.

We're spurring investment in infrastructure by protecting the real value of tax deductions during the costly start-up phase. Business investment means higher productivity, more jobs and higher wages – working smarter, not harder.

In transfer payments, we've already delivered a historic increase in the Age Pension, a new pension Work Bonus, the 50 per cent Child Care Rebate and Paid Parental Leave. And we're going to increase Family Tax Benefit for families with teenagers, and cut effective marginal tax rates for single parents and Youth Allowees.

For the environment, we're improving the Fringe Benefits Tax treatment of cars, making fuel tax more consistent, and putting a price on carbon pollution – described by the tax review as "a cost effective way to reduce Australia's carbon emissions".

The list goes on and on. I could equally talk about Disability Support Pension reforms, better reporting of superannuation payments, or establishing a new national not-for-profit regulator.

All of these reforms are crucial steps to a better system and a stronger, more modern economy.

Patchwork Pressures

Mr Speaker, the job of tax reform is never complete. There is no final destination, only one building block after another.

When I released the tax review, I said it would be a conversation for the next decade. The Tax Forum is the next part of that conversation.

Our next steps in tax reform need to recognise that our fundamentally strong economy is also a patchwork economy. We need to agree where we can build on the substantial reform agenda, geared towards helping businesses and workers who aren't in the fast lane of the mining boom.

We will meet at a time of immense change in the global economy, as economic weight shifts from West to East. Our natural advantages and geographic location mean Australia is uniquely placed to benefit from the strength of Asian economies. Not just in terms of demand for Australia's natural resources, though demand is at a record high.

Average prices for our resources exports have increased by around 200 per cent since the end of 2003, and on average mining employment grew 11 per cent per year over the same period. But beyond the mining boom, we stand to benefit from the immense opportunities for Australia in the growth of Asia's middle class. Remember, for all the growth in mining, it only contributed around 6 per cent of the 1.8 million new jobs created between 2003 and 2010.

Mr Speaker, the mining boom is an overwhelming positive for Australia, but it represents a mixed blessing for specific sectors of our economy. We know that the high Australian dollar means cheaper imports for consumers, but it also makes life tough for industries competing with those imports. We know that when industries and regions grow strongly, skills shortages and capacity constraints can emerge.

But we also know that over the longer term, the rise of the Asian middle class will improve prospects for many sectors, including many of those struggling with today's pressures. This includes things like high-tech manufactures, cultural and recreational services and advanced education.

Take tourism, a sector close to my heart. The strong dollar and global economic conditions are having an impact. But at the same time, tourist arrivals from China have more than trebled over the last decade, and continued growth in these emerging markets stands to deliver long-term benefits.

I don't believe any industry is destined for permanent decline or permanent growth. Rather, all are subject to ongoing change. That's why, like forward-thinking governments before us, our task is to sniff the winds of change and adjust our sails in a way that best secures the jobs and prosperity of Australians now and into the future.

Tax Reform in a Patchwork Economy

Mr Speaker last year only this side of Australian politics picked up on these economic changes. Unfortunately those opposite put the politics of the day before the challenges of our time.

Our tax reform package announced last year delivered on the core thrust of the tax review: getting a fairer return for Australia's non-renewable resources, and using it to help businesses across the economy by cutting business tax – an approach that is now broadly supported in the community.

We have singled out small business as a special priority. This side of the House is proud to stand for over a billion dollars of tax relief for Australian small businesses. The first thing every small business tells me is: get rid of needless complexity. We'll deliver some simplicity with instant write-off of any asset worth up to $6,500 and the first $5,000 of cars, vans and utes.

We are proud to stand for a research and development rebate that directs more support to genuine R&D, including a 45 per cent offset payable in cash for small and medium businesses. Cash flow, when small businesses need it.

Mr Speaker, many things drive productivity – our education, our skills, getting the incentives right so that resources go where they're best used. But world-class workers need world-class equipment, and business investment provides the tools. New investment is often the way that struggling businesses pay for their new lease on life. So I'm also proud to stand for cutting company tax, to reward investment across the economy.

We are investing a fairer return for Australia's non-renewable resources in the best way possible – in economic growth across our whole economy.

Business Tax and the Tax Forum

Mr Speaker, these measures are a start, and in two weeks time the threads of a patchwork economy and tax reform will be picked up again, at the Tax Forum. The Prime Minister and I want the Tax Forum to talk about how the tax system could work better for firms already under pressure to adapt to a changing economy.

Ahead of the forum, participants have already begun to raise ideas for business tax reform, often drawing on ideas in the tax review. The forum needs to take a good look at some of these ideas, especially if they can help with patchwork pressures.

One thing people have raised is the tax treatment of losses. Tax losses are simply expenses that a business has not been able to use as a deduction, because they are not profitable enough. Or not big enough to transfer the deductions to other businesses in the same corporate group. Or there has been a change of ownership or business focus that means they fall foul of rules limiting how tax losses can be used.

Not being able to use tax losses can hit the very types of businesses that we often see struggling in today's patchwork economy. Uncertainty about being unable to use legitimate tax deductions can discourage investment and sensible risk taking.

The Government has already taken steps on losses. For example in the Budget we announced we will maintain the value of the initial losses incurred by infrastructure projects of national significance.

People have raised different ideas for how to go further in this area. Some advocate uplifting losses more broadly than just infrastructure. Some advocate allowing businesses to deduct losses from previous taxes paid, allowing a cash refund like some other OECD countries do. Some focus on the rules that govern when losses can be used following a change in a firm's ownership or operational focus. I will be interested to hear this discussion taken further at the forum.

Another thing that people have raised is deductions for corporate equity. This is simply a notional deduction for equity finance, similar to the interest deduction that already exists for debt finance. The tax review discussed this as a potential long-term reform direction.

Advocates of this idea point out that it can target tax cuts towards less profitable businesses – those that may be under pressure or in emerging sectors. It might also improve macroeconomic stability by reducing tax incentives to finance business investment through debt rather than equity.

The tax review noted that this idea needs more investigation before it can be fully assessed. There are questions about its revenue cost, how it fits into the wider tax system, and how you would transition to it.

None of these things are easy, and the answers are not obvious. And any change needs to be funded. We will not jeopardise our strict fiscal strategy which has our budget position amongst the strongest in the developed world.

I hope business comes to the forum in this spirit – recognising we can't talk tax cuts without also talking about harder things like loopholes or unnecessary tax expenditures. I challenge the business community to nominate the business tax savings that could allow us to afford reforms like those I've just mentioned. Because I've made it very clear that sending households the bill for the business tax cuts is not the answer.

State Taxes

Mr Speaker, every one of the 32 reforms we have announced in the last 18 months demonstrates our commitment to tax reform at the federal level. This has been delivered despite our revenue base being hit by global economic conditions, and while we keep tax as a share of the economy below what it was under the Liberal Party.

But another message has come through loud and clear from the Australian community: some state taxes are the most inefficient in the federation. We are doing our bit and the States should as well. Indeed, nothing makes the need to talk about state tax reform more clear than when some States announce increases in stamp duties and the like.

All levels of government benefit from a more efficient economy, and all governments have responsibility for the impacts their policies have. State tax reform can't wait for the Commonwealth to stump up the cash.

In the last couple of years, the Commonwealth has announced $16.4 billion in extra health reform funding over 6 years from 2014-15, plus $3.4 billion to improve waiting times. This all builds on the health funding increase we announced in 2008 that delivered an extra $22.4 billion for the States. Total schools funding has almost doubled, at $65 billion over four years compared to $33 billion provided by the previous Government. And we've doubled National Disability Agreement funding to around $7.6 billion over six and a half years.

And this year, state GST revenue is expected to be double what it was when it was introduced – from $24 billion in 2001‑02 to $48 billion in 2011-12.

The Tax Forum provides the perfect opportunity for state governments to take responsibility for the taxes they impose, engage with ideas for reform, and build momentum for their reform efforts.

Conclusion

Mr Speaker, I have raised some big issues today, and many of them cannot be delivered overnight. As the tax review said, "it is neither possible nor desirable to make all of these changes too quickly." I've always said that tax reform is a long-term project.

Reform is hard. The adjustment is now, but the results take time. It's easy to support the spends, but a lot harder to fund them.

Too many people talk reform without solutions, or they rely on simplistic solutions like jacking up the GST, shifting the burden from business to people on low and fixed incomes. We can't build prosperity if everyone has their hand out. We can't all give ourselves a tax cut, and expect somebody else to pay it for us.

For our nation to get the most from the forum, everybody needs to put the national economic interest before self interest. To think what is good for the country, not just what is good for their organisation's bottom line.

If we can do that, we will find some common ground on the next steps for tax reform, and we can develop those proposals further. In doing so we will lay the foundation of a better tax system for all Australians, as part of a stronger, broader, more modern economy.